Zypherus Holdings Inc. v. Dorais Estate, 2012 ABQB 591

Court of Queen ’ s Bench of Alberta Citation: Zypherus Holdings Inc. v. Dorais Estate, 2012 ABQB 591 Date: 20120926 Docket: 1103 00486 Registry: Edmonton Between: Zypherus Holdings Inc. Appellant - and - Michel Dorais, Deceased and Sean Duncan, Personal Representative of the Estate of Michel Dorais, Deceased and Doug Sollows - and - Cedar Peaks Mortgage Investments Inc. Respondents _______________________________________________________ Reasons for Judgment of the Honourable Mr. Justice D.R.G. Thomas _______________________________________________________ I.

Introduction................................................................................................................ Page: 2 II. Facts............................................................................................................................ Page: 2

III. Non-Contentious Law................................................................................................. Page: 4 IV. Issues.......................................................................................................................... Page: 4 V. Analysis...................................................................................................................... Page: 4 A What is the standard of review on the appeal from the Order of Master Smart?.................................................................................................

Page: 4 B Does the Mortgage create a joint and several obligation on the part of the Mortgagors?.......................................................................................... Page: 5 C Can Zypherus obtain an order of foreclosure on the undivided one half interest of Dorais only?................................................................................... Page: 5 D What is the effect of the bankruptcy of Dorais? Does the bankruptcy order stay the claims made by Sollows against the Estate of Dorais in respect to payments on the first mortgage and the municipal taxes?............... Page: 6 VI.

Costs........................................................................................................................... Page: 7 I. Introduction [ 1 ] Zypherus Holdings Inc. ( “ Zypherus ” ) appeals an order made by Master Smart, dated January 12, 2012 (the “ Smart Order ” ) in which he dismissed an application by Zypherus for an order of foreclosure in respect to lands registered in the name of Doug Sollows ( “ Sollows ” ) and Michel Dorais ( “ Dorais ” ), now deceased.

Each of Sollows and Dorais own an undivided half interest in parcels described on two separate titles as Plan 6818ET, Block 14, Lot 14 and Lots 15 and 16 ( “ the Property ” ), which are vacant commercial lands in the City of Edmonton. The mortgage security being foreclosed is registered against title to the property as a second mortgage, Instrument No. 082 122 517 (the “ Mortgage ” ). [ 2 ] Since the appeal was filed by Zypherus, the Estate of the Deceased Dorais has become bankrupt and BDO Canada Limited ( “ BDO ” ) has been appointed as the Trustee of his Estate.

In this decision I allow the appeal, in part, but defer the issue of the type of foreclosure order to be made until I receive and consider further submissions from the parties on the question of whether it is appropriate in these circumstances to make a direct final order for foreclosure as opposed to some other type of foreclosure order. II. Facts [ 3 ] Dorais and Sollows granted a mortgage of the Property to Marc and Barbara Tougas (collectively described as “ Tougas ’ ” ) for $300,000.00 (the “ Mortgage ” ). These funds were advanced by Tougas and were used solely by and for the benefit of Dorais.

Sollows was involved in the transaction solely as an accommodation to Dorais. Dorais executed an indemnity agreement in favour of Sollows, but that indemnity has never become a charge against title to the Property.

[ 4 ] Dorais became insolvent and then died. Sollows, in an effort to protect his interest, lent money to Zypherus to put it in a position to buy the mortgagee ’ s interest from Tougas. The purchase of that interest has been completed and Zypherus now stands in the same position as the original mortgagees, (i.e. Tougas). Zypherus released Sollows and then took this foreclosure action against the interest of Dorais in the Property only.

If successful, this would extinguish the half interest of Dorais in the property, but leave the interest of Sollows intact. [ 5 ] The balance outstanding on the Mortgage as at November 1, 2010 was $406,233.30, with a per diem of $136.68, bringing the outstanding balance as at April 1, 2012 up to $427,008.66, plus legal costs. [ 6 ] There is also a first mortgage registered against title to the Property, with a balance outstanding at the date of the death of Dorais in June 2009 of $76,434.00.

All payments due on that first mortgage after the death of Dorais have been made by Sollows. [ 7 ] Sollows has also made all municipal tax payments in respect to the share of Dorais for the years 2009 to 2011 inclusive, which amount to $17,260.00. [ 8 ] In the original application before the Master, Zypherus as applicant had sought: a A declaration that the amount owing under the Mortgage and the other adjustments between co-owners as to payments on the first mortgage and property taxes are to be a charge against the beneficial interest of Dorais in the Property; b Judgment against the Defendant, Dorais in the amount of $427,008.66, as at April 1, 2012, plus legal costs; and c A direct final order for foreclosure against the half interest now held by the Estate of Dorais in the subject Property. [ 9 ] There is an additional interested party, namely Cedar Peaks Mortgage Investments Inc. ( “ Cedar Peaks ” ), which is a judgment creditor of the Estate of Dorais.

The interest of Cedar Peaks is registered against title to the Property in the form of a writ, Instrument No. 112 156 885 (the “ Writ ” ). The Writ claims an interest against the Estate of Dorais only. [ 10 ] Since the appeal from the Master was filed, BDO has been appointed as the Trustee of the Estate of Dorais and resists the appeal, along with Cedar Peaks. III. Non-Contentious Law [ 11 ] There is no dispute that a direct order for foreclosure is available pursuant to s. 42(2)(c)(ii) of the Law of Property Act because the Property is a vacant, undeveloped commercial site.

However, a question remains as to whether this is an appropriate remedy in all the circumstances of this case. IV. Issues [ 12 ] A number of issues arise on this appeal and they include:

A What is the standard of review on the appeal of the Order made by Master Smart? B Does the Mortgage create a joint and several obligation on the part of the Mortgagors? C Can and should Zypherus obtain a direct final order of foreclosure on the undivided one half interest of Dorais only? D What is the effect of the bankruptcy of Dorais?

Does the bankruptcy order stay the claims made by Sollows against the Estate of Dorais in respect to payments on the first mortgage and the municipal taxes? [ 13 ] Over and above these issues, the claim of Zypherus for judgment on the Mortgage debt and costs also remains outstanding. V.

Analysis A What is the standard of review on the appeal from the Order of Master Smart? [ 14 ] Under new Rule 6.14(3) an appeal from an order of a Master to this Court is an appeal on the record of proceedings before the Master, although it may be based on additional evidence admitted on leave by a Judge of the Court of Queen ’ s Bench of Alberta who hears the appeal. In a recent decision of the Alberta Court of Appeal in Bahcheli v.

Yorkton Securities Inc. , 2012 ABCA 166 , Côté, J.A. has made it clear that the standard of review on an appeal from a Master to a Judge, on all issues, is one of correctness, which means no deference need be shown to the decision of the Master.

The hearing of an appeal is de novo and here it is based on the evidence, and only the evidence, which was before the Master, subject only to the new fact that the Trustee has been appointed to represent the Estate of Dorais. [ 15 ] While it is not required by law that I find some error on the part of the Master in making this decision, it is my practice to explain why I do not agree with the learned Master whose decision is being appealed.

Therefore, the part of the reasons for his decision with which I do not agree related to his apparent error in failing to focus on the position of Zypherus as the mortgagee which had security over the Property under the Mortgage. In this proceeding Zypherus sought to foreclose the interest of Dorais, one of the mortgagors. That seems to have been overlooked by the Master; his focus seems to have been on the interest of Sollows as a mortgagor and as an unsecured creditor of Dorais.

Further, in his written decision, he speaks of there being no evidence of a release of part of the Property, or of Sollows, when counsel for Zypherus was before him and stated clearly that Zypherus was releasing its claim against Sollows and the interest of Sollows in the Property.

That was an admission which should have been taken into account by the Master, but was not. [ 16 ] However, in the end result, I do not necessarily disagree with what I think was the final position of the Master on remedy, which was that he did not think that a direct final order of foreclosure was available and that the Appellant/Applicant should consider seeking an order for sale. I will come back to the issue of the form of remedy after hearing further submissions from the parties.

Before doing that, I will deal with some of the other issues raised by the parties at the appeal hearing, namely: B Does the Mortgage create a joint and several obligation on the part of the Mortgagors? C Can Zypherus obtain an order of foreclosure on the undivided one half interest of Dorais only?

[17] BDO, as the Trustee for the Estate of Dorais, takes the position that the debt secured by the Mortgage is a joint debt and not ajoint and several debt. Both of the mortgagors (debtors) were named as defendants in this foreclosure proceeding. However, the Trusteeargues that because Dorais and Sollows are joint debtors and because Zypherus has released the mortgagor/debtor Sollows only, it mustfollow as a matter of law that because one joint obligor has been released, the other joint obligor, namely the Estate of Dorais, must alsobe released.

The Trustee’s counsel relies on an extract from Glanville Williams in his treatise entitled Joint Obligations, 1949Butterworth and Co. [18] Zypherus replies that in this case the terms of this particular Mortgage make the mortgage debtors, i.e. the mortgagors, Sollowsand Dorais, jointly and severally liable and it follows that the proposition that the release of one joint debtor thereby releases the other isnot applicable. Zypherus refers to paragraphs 19(

b) and 19(

h) of the Mortgage. It argues that the loan, and the Mortgage granted by themortgagors as security for that loan, are expressly joint and several obligations and not simply joint. [19] I agree that the effect of the words in paragraph 19(

h) of the Mortgage make the obligation of the mortgage debtors (Sollowsand the Estate of Dorais) to repay the debt joint and several. I conclude that the loan which created the debt and the Mortgage granted byDorais and Sollows to secure that debt of $300,000.00 are by the express words of the Mortgage joint and several and not joint. [20] Based on this conclusion that the obligation of the Mortgagors is several and not joint, I also conclude that the effect of theexpress wording of paragraph 19(

b) of the Mortgage allows the mortgagee (now Zypherus) to release Sollows, including his half interestin the Property, as well as any obligations which may be imposed on Sollows under the Mortgage as a surety. [21] A claimant can stand before a Court in any litigation and release another party against whom a claim is being made by simplystating that to the Court. Such a release is effective and binding on the party granting the release. In this case, the Mortgage allows arelease, because the party being released has a several interest.

Further, here an admission has been made by counsel for Zypherus thatSollows is released and I accept that the release of Sollows is effective and available against all parties. Accordingly, Zypherus canobtain and I will grant some form of an order of foreclosure in respect to the undivided one half interest of the Estate of Dorais in theProperty. I will hear further submissions on what type of order of foreclosure should be made in this circumstance. D What is the effect of the bankruptcy of Dorais?

Does the bankruptcy order stay the claims made by Sollows against theEstate of Dorais in respect to payments on the first mortgage and the municipal taxes? [22] The position of Zypherus is that it has a secured claim under the Mortgage and it is enforcing its security and there is noorder of any court staying the enforcement by a secured creditor. [23] Two cases are put forward in support of the position of the Trustee, specifically A.N. Bail Co. v. Gingras et al., (SCC), [1982] 2 S.C.R. 475, and my decision in Horizon Earthworks Limited, 2011 ABQB 799.

The argument of BDO appears tobe that Sollows is nothing more than an unsecured creditor pursuing the Estate of Dorais on the indemnity which had been granted byDorais in favour of Sollows. [24] Both of the cases to which I have referred are distinguishable. Here, Zypherus (as mortgagee) has a secured interest throughthe Mortgage in respect to the Property which is the target of the foreclosure. Zypherus is a secured creditor with classic security througha land mortgage.

Zypherus is entitled to enforce that security as against the Property and the stay arising from the bankruptcy in respectto claims against Dorais is of no effect. [25] There is, however, a question of whether Zypherus can make a claim through the enforcement of its security on the amountsadvanced by Sollows to maintain the first mortgage in good standing (which created an equity in favour of Sollows, but not Zypherus)and payments by Sollows in respect to Dorais’ share of the taxes, to protect the interest of both Mortgagors in the Property, as against theclaims by the City of Edmonton as the municipal taxing authority.

Payment of these taxes created another equity in favour of Sollows,

but not Zypherus. [ 26 ] Therefore, there are two equities/equitable interests arising from the first mortgage payments and the tax payments as against the Estate of Dorais. [ 27 ] However, a claim by Sollows for indemnification for payments on the first mortgage and reimbursement for his share of taxes is not covered by the Mortgage and Sollows is an unsecured creditor in respect to those advances. Zypherus has no right to a judgment for these amounts as against the Estate of Dorais. Therefore, these amounts will not be included in any judgment as to the amount outstanding under the Mortgage. [ 28 ] In

summary, the bankruptcy order does stay the claim against the Estate of Dorais for the equitable claims of Sollows in respect to payments on the first mortgage and for municipal taxes. It has no effect on the proceeding by Zypherus to enforce its security against the Property. [ 29 ] I will now receive submissions from counsel on the type of foreclosure order which may be appropriate in the circumstances of the case and on an updated judgment for the amount owing under the Mortgage. VI. Costs [ 30 ] The parties may speak to costs of the appeal hearing held on May 24 th . Heard on the 24 th day of May, 2012.

Dated at the City of Edmonton, Alberta this 26 th day of September, 2012. D.R.G. Thomas J.C.Q.B.A. Appearances: Edwin A. Bridges, QC (Snyder & Associates LLP) for the Appellant

Mr. M. J. McCabe QC (Reynolds, Mirth, Richards & Farmer LLP) for the Respondent BDO Canada, for the Estate of Dorais Mr. N. J. Forster (Bishop McKenzie) for the Respondent Cedar Peaks